Due diligence in real estate simply means investigating all aspects of a property to determine whether investing in that property makes sense. It is important to note that very few individuals do proper due diligence before investing in real estate. Due diligence real estate is extremely important because real estate investments are expensive and accompanied by many risks. You can't afford to depend on the honesty a seller when making real estate investments. Below are important steps/tips to follow when carrying out due diligence for real estate property you intend to buy.
1. Real estate due diligence starts with the pre-contract: This is a very important tip/step to consider. You must read and understand the pre-contract before you consider investing in real estate. The contract you get must allow you certain things i.e. adequate time to carry out due diligence, the right to withdraw from the contract should the seller not fulfill any contractual obligations e.t.c. It is important to note that there are many other aspects of a pre-contract that are important. You may therefore be required to hire a real estate lawyer for legal advice. In summary, the pre-contract should allow adequate time for due diligence otherwise you should think twice about making that investment.
2. The due diligence shouldn't be done too quickly or superficially: It is important to note that due diligence differs depending on the type of real estate. For instance, commercial building due diligence is different from residential building due diligence. It is important for first time investors to stick with real estate investments that they are familiar with especially when doing due diligence without expert help. If you have already carried out investigations on certain real estate aspects i.e. city ordinances, zoning, planning, you should have an idea of what is allowed. You should also be able to discover new possibilities. In case you are unaware of the investigation process, feel free to ask for help. Due diligence isn't that difficult. It is just time consuming.
3. Hire a certified inspector to carry out physical inspection: This is another important tip to consider when performing real estate due diligence. It is impossible for an investor to carry out an accurate physical inspection on a property if the investor isn't a certified inspector. Getting a certified inspector is a must. To get the best certified inspectors, consider inspectors with adequate experience and references. It is important to note that the best inspector shouldn't know everything. They should however know enough to give proper recommendations i.e. recommending for more inspections in case they notice any warning signs.
4. Hire a professional to carry out financial investigation: After you have carried out the physical inspections, the next step of the due diligence is doing financial investigation. This step also requires a professional because of the complexity of the financial data. You may also be required to do analysis. Financial investigation for a rental property basically entails; vacancy rates, rental history, property management fees, maintenance fees, insurance, taxes, cap rates, fixed costs, variable costs, financing options e.t.c.
In summary due diligence real estate has many aspects. With the above tips/steps it is possible to focus and have a planned approach when investing in real estate to ensure that you make an informed decision. The important thing is understanding real estate due diligence and make ensuring that it is done thoroughly.